Going through bankruptcy can be an incredibly stressful time in a person's life, but the aftermath of the process can be equally as difficult. Having a poor credit rating and a dent to your confidence can make the process of re-applying for a mortgage challenging, but there are still lots of options to enable you to secure your own home - here I guide you through them and give some helpful advice on how to make the application run more smoothly.
Timing is Key
The first rule to remember when re-applying for a mortgage is that timing is key. The amount of time you have to wait after your bankruptcy discharge varies depending on the type of bankruptcy, but for the most common type – 'Chapter 7' – the waiting time is at least two years for an FHA mortgage and then four years for a conventional loan. Although sometimes the waiting time for an FHA mortgage can be reduced to one year with extenuating circumstances this is not a wise move, as your down payment and also your interest rates will definitely be higher - a major factor when you consider how long you'll be repaying the loan.
Rebuild your credit score
Once your bankruptcy discharge process is over you need to start rebuilding your credit score. Every year you're entitled to one free credit report from each of the three credit bureaus (Equifax, Experian & TransUnion), so start by checking your credit report with each. Make sure that there is no incorrect information, and dispute any mistakes with the particular credit bureau in question – note that it's often easier to do this online through the bureau's website.
Other ways of rebuilding your credit score include using secured credit cards. These are credit cards which limit the amount of spending you can incur each month, and although they often have a lot of fees (for example for the application, monthly fees etc) they are a good way to be able to progress back to a non-secured credit card. Paying your monthly balance on time with these types of cards is important - otherwise you are often penalized with a fee. When building up your credit using a credit card other tips include not using all of your credit and also paying off your balance early when possible.
Extra steps you can take to ensuring your re-application goes smoothly include paying all of your bills on time and also making sure any tax liens are removed. Saving up a good amount of money during your waiting time is also a good idea, as this will allow you to make your down payment (typically 3.5% for a FHA mortgage) easily. Making a larger down payment if possible is also beneficial and can secure better interest rates for the rest of your repayment period.
Although re-applying for a mortgage following a bankruptcy can be a little tricky, it is definitely possible, and in some ways an advantage because in waiting two years you have the chance to save and really prepare for such a huge financial commitment.